Nabors Industries (IL/A): Land rig market outlook remains intact; Raising estimates and fair value - Goldman Sachs - May 09, 2006
We are raising our Nabors' 06/07 EPS to $3.34/$4.50 from $3.08/$4.03 driven by US Land and Well Svcs. Despite gas inventories and newbuilding, we believe the US land outlook remains intact. We see approx 250 new and 150- 175 refurb rigs entering over the next 2 years, with virtually all newbuilds backed by contracts. In short, we do not expect spot mkt availability to increase meaningfully, and we expect rig rates (up 15+% in the last 1-2 quarters) to continue to rise. We believe (1) concerns about Canadian rig immigration and operators verticalizing drilling activities are overblown and (2) producers need to believe a sub-$7 gas scenario through winter to cut activity. We are introducing 08 EPS of $5.01 and raising our fair value to $43 (7.5x 07E EV/DACF) from $39, +11% upside. We believe additional share repurchases are possible, maybe debt financed. Maintain IL/A.
VALUATION
We estimate fair value of $43 based on 7.5x 2007 EV/DACF. On 2007E EV/DACF, NBR is trading at 6.7x, a 11% discount to both the offshore drillers and to well servicing company BAS and vs. a historical average multiple of 13.1x. While NBR fundamentals remain strong, natural gas inventory fears may trump strong company performance in the short term. We believe this will create a buying opportunity... but one that may require patience. We also believe that NBR mgt is committed to increasing the level of share repurchase, possibly funded with debt, to combat further multiple compression. Despite our cautiously optimistic outlook for the land drillers, we see more upside in the offshore drillers, where barriers to entry are higher and gas inventory concerns are lower. Near term, we highlight Transocean (IL/A) given potential for significant share repurchase or dividend activity following the May 11 board meeting.
1Q06 RESULTS AHEAD OF EXPECTATIONS.
Nabors 1Q06 EPS of $0.79 exceeded our $0.70 and consensus $0.74. Consolidated EBITDA was 14% above our model. Key sources of EPS outperformance included: (1) Higher US Land drilling revenues (+$0.04 EPS variance); (2) higher Canadian operating income driven by lower costs (+$0.05); (3) higher Oil & Gas operating income (+$0.03); (4) higher Other (+$0.01); and (5) higher US Well Servicing revenues (+$0.01); offset partially by (4) lower Alaska revenue (-$0.04); (5) lower International revenue (-$0.01).
WE RAISED OUR 2006E EPS TO $3.34 FROM $3.08
We are raising our 2006EPS estimate by 8% to $3.34 due primarily to (1) higher day rates and fleet size in Canada (+$0.13); US Land (+$0.22); US well servicing (+0.06) and US offshore (+$0.07); offset by (2) higher expenses in Alaska (-$0.05) and International (-0.01); (3) higher S,G&A (-$0.11) and (4) higher tax rate (-$0.04). The details of our US land estimates are as follows: (1) 270 rigs years vs. 279 prior offset by (2) average margin of $10,541 vs. $9,511 prior.
WE RAISED OUR 2007E EPS TO $4.50 FROM $4.03
We are raising our 2007EPS estimate by 11% to $4.03. Key drivers include:
(1) higher day rates and fleet size in US Land (+$0.20); Canada (+$0.16); US well servicing (+0.07); and US offshore (+$0.10) and
(2) higher Oil & Gas and Other (+$0.07); offset by
(3) higher expenses in Alaska (-$0.04) and International (-0.01);
(4) higher S,G&A (-$0.12) and
(5) higher tax rate (-$0.06).
The details of our US land estimates are as follows:
(1) 323 rigs years vs. 342 prior offset by
(2) average margin of $11,341 vs. $10,311 prior.
WHAT TO WATCH FOR.
(1) Rig years guidance for Lower 48 Land revised to 270 from 275 vs 236 in 05; operating rig count currently at 256 and estimated to be at 305 by year end.
(2) Lower 48 Land improvement in 06 expected to be driven mostly by pricing, whereas capacity expansion should outweigh the increase in pricing in 07.
(3) Similarly, approx. two thirds of the improvement in well-servicing is expected to come from pricing, while 70% of international growth is expected to come from capacity. In Canada, 70% of 06 growth will be due to pricing, with new capacity projected to contribute an increasing percentage in the out years.
(4) Share repurchase efforts expected to accelerate for the remainder of the year.
(5) 2006 capex projected to be under $1.6 bn at under 4 times 1Q spending.
(6) Tax rate guidance revised to 30% as NBR has a growing contribution from U.S. income which is subject to a ~35% tax rate.
(7) Percentage of committed rigs is currently at approx. 50% and is expected to rise with the addition of newbuilds.
IMPLICATIONS FOR THE INDUSTRY.
Mgt remains convinced that current upcycle conditions are sustainable and believes high natural gas storage levels and increasing land rig capacity will have little impact both on operators' plans and on NBR. In addition, mgt does not see an oversupply of rigs, despite a projected 20% increase in rig supply over the next two years. While we generally agree with mgt's comments regarding the ability of the market to absorb rigs, we are more concerned with the pace of margin expansion, which has been down Q/Q for the last few quarters.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Jason Gilbert, Daniel Henriques. |
